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Investors Turn Their Eyes Back to Gold

U.S. equities climbed again on Wednesday as the Federal Reserve raised interest rates and penciled in another three quarter-point hikes for 2018. Policymakers pointed to an expected pickup in GDP growth, ongoing strength in the labor market and the specter of a big fiscal policy push from the GOP’s tax cut legislation as rationales for their action.

In her post-meeting press conference, Fed chairman Janet Yellen said she expects a pickup in economic growth and business investment and she blamed the lack of wage growth on slow productivity gains. Concerning Bitcoin, she labeled it a highly speculative asset that is playing a very small role in the financial system.

In the end, the Dow Jones Industrial Average gained 0.4%, the S&P 500 lost 0.05%, the NASDAQ Composite gained 0.2% and the Russell 2000 gained 0.6%. Treasury bonds strengthened, the dollar was under pressure, gold gained 0.6% and crude oil lost 0.9%.

Breadth was positive with 1.3 advancers for every declining issue while trading volume was 104% of the NYSE’s 30-day average. Consumer staples led the way on a 0.5% gain while financials were the laggards, down 1.3%.

Finisar Corporation (NASDAQ:FNSR) gained 22.8% on the awarding of nearly $400 million from Apple Inc. (NASDAQ:AAPL) to fund the production of optical lenses needed for its Face ID system. Caterpillar Inc. (NYSE:CAT) gained 3.6% on reporting a 26% increase in three-month machinery sales. And Overstock.com Inc (NASDAQ:OSTK) gained 13.9% on reports its founder is exploring options to sell and create a digital property registry based on blockchain technology.

On the downside, TiVo Corp (NASDAQ:TIVO) fell 7.6% on a downgrade from analysts at FBR on its ongoing dispute with a cable operator.

Turning to the economic data, core CPI came in a little soft despite yesterday’s hot PPI reading, suggesting inflation remains a little tepid. Goldman Sachs highlighted that the more-persistent shelter and medical care services components drove the downside. Republicans have already reached a tentative deal on their tax cut plan and plan to hold a vote before Christmas.

Conclusion

Keep an eye on what’s happening in the gold market, which has been underperforming lately amid the focus on Bitcoin and the seven-day rally in the U.S. dollar. The GOP’s tax cut plan will pour gasoline on the economy and light a match at a time when output is very near capacity. The job market is tight, with just one unemployed worker for every open position. Small business surveys show difficulty finding qualified help.

All of this suggests wage gains are coming, which will boost inflation measures and end this recent “Goldilocks” scenario of good growth, a dovish Fed and no price pressure. Policymakers are likely to fall behind the curve, which could drive interest into precious metals as the Bitcoin fad fades.